In October, Governor Polis jokingly discouraged Texas from legalizing marijuana because “...it would reduce tourism to Colorado, so make sure to consider Colorado first in any Texas decisions.”
While the snarky remark was in jest, Polis wasn’t just blowing smoke. Reports vary slightly, but in addition to employing over 40,000 of its residents in the cannabis industry, Colorado has collected over $1 billion in tax revenue since legalizing cannabis. That’s quite a powerful hit.
Yet,despite a lagging economy and rising unemployment, Texas decided to ignore Polis’ tweet and continue sending their weed dollars to Colorado. But hey, that’s Texas.
With an eye toward the success of Colorado, though, five other states decided their residents should determine if cannabis would be legalized. On Nov. 3, voters in Arizona, New Jersey, South Dakota, and Montana overwhelmingly approved ballot initiatives to legalize cannabis for all adults. Mississippi took the first step toward recreational marijuana when voters approved a long-overdue medical cannabis program.
At the state level, it’s clear that voters’ changing attitudes about marijuana, coupled with legislators’ drive to replace shrinking tax revenues, are propelling a green wave across the USA.
Changes are happening at the federal level, albeit more slowly than with the states. Archaic laws based on disproven myths — and the refusal to concede to popular vote — are slowly giving way to decades-old efforts to legalize marijuana across the country, and the proof is in the pudding.
The election day green waveThe Biden/Harris victory wasn’t the only big news to come from November’s elections. The state legalizations were, too.
Since 2000, 36 states have legalized medical marijuana — with 15 of the states and D.C. also legalizing recreational cannabis. This gives the majority of Americans some form of legal access to marijuana.
The reasons behind the long-term push to legalize cannabis vary wildly, though — and include everything from economic factors, social justice reform, medical necessity, and better education surrounding weed.
Those same old reasons are driving this new round of legislation, too.
As of early next year, Arizona will begin to issue licenses to cannabis-related businesses. When this happens, they will also collect a whopping 16% tax on non-medical cannabis. The tax revenue collected from weed sales will cover administrative costs, provide funds for community colleges, social justice reforms, and public services.
The legalization in New Jersey, on the other hand, will impact more than just tax revenue. The legalization in that state will likely fast-track efforts for legalized weed in neighboring states.
Unlike states in the Midwest or South, the Mid-Atlantic states are closely connected geographically. There are about 130 million people within a 2-hour drive of NJ. Chances are that their states will likely legalize soon. The only other option for the weed-barren neighboring states is to allow NJ to siphon all the tax revenue created from legal weed sales.
“New Jersey becomes a critical state in that Mid-Atlantic, Northeast corridor,” said Steven Hawkins, Executive Director at Marijuana Policy Project. “..I think it’s the key to what happens in the rest of those states in the coming year. There has been a slow start in that section of the country. But with New Jersey passing this ballot initiative, I think that will change.”
When it comes to taxes, New Jersey voters were allowed a say in the rate, so taxes on non-medical marijuana in the Garden State will be some of the lowest in the country at 6.625%. Municipalities are allowed to tack on up to 2% more, making the maximum tax rate in New Jersey on cannabis just 8.625%. That’s a steal compared to Colorado’s retail sales tax on non-medical cannabis — which is a whopping 15%.
And then we have South Dakota. Interestingly, the Rushmore state made history as the first state to bypass the typical two-step cannabis legalization process — medical use and then adult use. Voters in that state approved a measure for medical marijuana and amended their state constitution to allow recreational weed, too. In return, South Dakota will collect 15% on sales of non-medical marijuana. As with several other legal states, the money will be used for public schools and the state’s general fund.
Montana voters also approved an initiative to allow recreational cannabis. Montana’s tax plan is nothing like New Jersey’s, though. This state plans to tax non-medical marijuana at 20%! The Treasure State anticipates weed demand could rake in $48 million a year in tax revenue within the first five years. And, as with Colorado, Montana will only be issuing cannabis business licenses to residents — keeping a tight rein on the industry in the state. Montana’s initiative also creates paths for those with previous weed convictions to have their records expunged.
Mississippi will finally get its own medical marijuana program after years of watching University of Mississippi supply federally-approved medical researchers in the country with weed. The medical program may face some issues with the quality of its available weed, though.
According to Green Entrepreneur, scientists have complained about the university’s low-grade weed for years. It’s unclear how well the medical program will be supplied given the reported quality control issues in Mississippi, but it’s a start.
It’s important to keep in mind that these are all states with wildly varying political climates and leanings. Election 2020 didn’t just reveal how far cannabis has come in the last decade. It also revealed just how greatly divided the U.S. population is in its political ideologies — except for their overwhelming desire to legalize cannabis.
Marijuana, it seems, is one of the few bipartisan issues in this country.
“This was not a red state/blue state issue,” Greg Kaufman, co-lead of the cannabis practice at Eversheds Sutherland, told Law360. “You had ballot measures in both red and blue states, and the support was pretty consistent. In most of those states, the cannabis measure was more popular than the winning presidential or senatorial candidate.”
While the political and cultural makeup of these states is very diverse, the one common thread is that the tax revenue they stand to gain will afford big changes for their residents — and likely spur other states into moving toward legalization, too.
States with legalized marijuana have reaped the benefits resulting from this renewable resource. According to Marijuana Business Factbook, U.S. cannabis sales were $13 billion in 2019 and should reach $18 billion for 2020.
Cash-strapped governments are seeking ways to replace revenues lost as a result of the devastating economic impacts of COVID-19. Legalizing cannabis is one of the least expensive methods for rapidly filling empty coffers with much-needed revenue.
We’ll likely see more states legalize in some form or fashion in the near future, if for nothing more than to ease the cash flow constraints the nation is dealing with. But at what point does state legalization give way to federal law?
The federal legalization path is murky but possible One of the major hurdles with federal legalization is that cannabis is still considered a Schedule I drug at the federal level, despite it being legal in 36 states. While cannabis drug scheduling doesn’t make much difference to legal states, it makes all the difference in how the industry functions — as well as how cannabis research within the U.S. is conducted.
The 1970 Controlled Substances Act (CSA) dictates that Schedule I drugs are banned for any use except in narrowly focused, government-approved research projects. Schedules II-V drugs are legal for medical use only. Because cannabis was placed onto Schedule I in 1970, medical and recreational use remains illegal under Federal Law — as does any real research into the benefits of cannabis as medicine.
While the federal government has generally not interfered with state legalization laws, most marijuana businesses and consumers are forced to navigate a complex patchwork of regulations that technically make them criminals at the federal level.
The federal government is also still digging its heels in on marijuana by destroying cannabis plants through the DEA’s eradication programs — all while medical researchers beg for research-grade marijuana, or permission to study the plants at all. While legal state industries are thriving, federal agents are still destroying cannabis plants in illegal states. And we’re all paying for it to happen.
According to the 2019 DEA National Drug Threat Assessment, approximately 3 million plants and over 300,000 pounds of processed weed were burned by contractors who were paid with taxpayer dollars.
But even as the federal agencies push back, there’s still hope that enough brute force will push forward federal legalization. And there is hope on the horizon. Not only are there several potential cannabis-related bills waiting in the wings, but there’s also the disaster that was 2020 adding fuel to the ganja fire, too.
This year’s massive unemployment, business failures, and projected deficits brought about by COVID-19 could prove to be the final economic assault needed to push forward federal legalization efforts for cannabis.
The policies that may help fix the industryThere’s a huge push for both state-by-state and federal legalization occurring as we speak. We saw it with the movement of states from illegal to legal during this election season, and chances are, we’ll continue to see more momentum.
One example of the potential momentum is the Marijuana Opportunity Reinvestment and Expungement Act (MORE) of 2019. The MORE Act is a bill that would decriminalize marijuana at the federal level by removing cannabis from the CSA. It would also purge criminal penalties for individuals who manufacture, distribute, or possess marijuana. Not bad for a conservative-leaning government that still considers marijuana a gateway drug.
Even cooler? The MORE Act also establishes a process to expunge convictions, creates economic protections for cannabis-related businesses, and places a 5% tax on cannabis products (hey, the money’s got to come from somewhere).
The MORE Act applies only to federal law, though — states would continue to decide how to regulate cannabis within their jurisdictions. And there’s real hope for this bill. Following the results of the November 2020 elections, House Majority Leader Steny Hoyer (D-MD) announced the MORE bill would get a floor vote in December.
Another measure that has been in the works for some time is the Secure and Fair Enforcement (SAFE) Banking Act of 2019. Financial institutions are bound by federal regulations, so any financial institution that works with cannabis clients is at risk of being prosecuted for laundering or racketeering charges. This prevents most of the cannabis industry from accessing basic financial services.
“The pressure on Congress to regularize banking for the cannabis industry is now being felt across the country,” said Hawkins.
The SAFE Banking Act would allow banks, credit unions, and other financial institutions to work with cannabis clients in states — like Colorado — where cannabis is legal. SAFE would also allow customers in legal cannabis states to make purchases with their credit cards.
While SAFE passed the House in September 2019, it has not moved into the Senate for a vote— despite the ever-increasing need for the protection it would provide for businesses, consumers, and the general public.
But while several federal bills have been proposed that are related to cannabis, there is one noticeable gap: a legalization bill.
That may change in the near future, though. While much work remains to dispel antiquated notions of and myths about the consumption of cannabis products, the recent wave of state legalizations has increased pressure on the Senate and House to align federal cannabis laws with the wishes of the majority.
If it happens, federal legalization would be consistent with the worldwide trend, and more specifically, our closest North American neighbors. Our northern neighbor, Canada, legalized cannabis use for all adults in 2018.
Our southern neighbor, Mexico, decriminalized possession of personal amounts in 2009 and in 2018 their Supreme Court ruled that prohibiting recreational use of cannabis was unconstitutional. While the government in Mexico has yet to remove the prohibition formally, the effect of the ruling generally decriminalizes cannabis by making the prohibition unenforceable.
The Supreme Court of Mexico has continually extended its deadline for legislators to remove the language — with the next deadline being December 2020, which is about the same time our House will vote on the MORE Act.
But where do all of these changes leave Colorado?While the rest of the nation pushes forward, the momentum behind the newly legal states leaves Colorado in the dust. Our state’s laws pioneered the way for the rest of the country, but they haven’t caught up to the other states yet. We started the trend and then stayed at a standstill.
Despite its reputation as the leader in establishing a legal marijuana industry, Colorado has yet to effectively tackle the banking challenges faced by its cannabis businesses and consumers. The majority of cannabis businesses in Colorado still operate on a cash-only basis and that makes them, and their customers, targets for robberies, assault, and other crimes.
“Because of these federal prohibitions on cannabis, businesses have been blocked from accessing conventional financial products that other legal businesses take for granted, and the lack of banking opportunities and access to other financial services in Colorado really poses both an economic threat and a public safety threat,” Governor Jared Polis said.
That’s not to say they aren’t trying to improve, though. In Feb 2020, Gov. Polis and Colorado’s Department of Regulatory Agencies (DORA) released the “Roadmap to Cannabis Banking & Financial Services.“ DORA’s Roadmap was created as a means to encourage and provide guidance for state-chartered financial services to provide services to legal cannabis-related businesses.
“The lack of federal clarity creates a level of uncertainty and apprehension for our Colorado state-chartered banks and credit unions to provide basic financial services to legal cannabis-related businesses,” said DORA Executive Director Patty Salazar.
According to the Roadmap, “The Divisions of Banking and Financial Services have reviewed existing Colorado statute and rules and found no chartering or licensing requirements that are significant impediments to regulated entities for providing banking and financial services to the Colorado cannabis industry.” Even so, it’s difficult to find banking partners for the industry.
And yet, some Colorado cannabis businesses have made it work via a silent banking partner that’s operating at the risk of its own business. Good luck finding out who those financial institutions are, though. Those businesses that do have a banking partner are reluctant to share the name of the institution with anyone.
It’s not as if a cannabis business owner can roll into the corner financial institution, present a business license, financial records, and simply open an account, either. The process generally involves a complex referral system and getting onto a waitlist for a banking services provider.
Even when they are approved, cannabis businesses incur significantly higher fees as compared to other business banking clients. But then again, most businesses don’t require armored trucks to transport their large cash deposits.
“Too many Colorado businesses, employees, and communities have been targets of assault, robbery, and other crimes due to the conflict between state and federal law when it comes to cannabis banking. I appreciate Governor Polis and his team working to improve access to the financial industry for Colorado cannabis and cannabis-related businesses. However, it is critical that Congress acts, including by advancing the SAFE Banking Act. Only by aligning state and federal law can we fully resolve the issues necessary to get cash off our streets and improve public safety in our communities,” said Congressman Ed Perlmutter.
The best hope for fixing a broken Colorado banking system is — ironically — through a federal bill. Cannabis may still be Schedule I, but SAFE could be the key to protecting Colorado cannabis businesses from banking issues.
The lingering questions about the legalization movementAs much as we see the push towards more legal states as an improvement, there are concerns about how this progress will impact existing cannabis businesses. And, there are more questions than answers.
Could federal legalization encourage the growth of large, multi-state operators to the point where existing independent cannabis-related business operators simply cannot compete? There’s a good chance that it could happen — and it could severely harm the small guys in our state and others.
Is the Walmartization of weed a real possibility, and if so, how would that play into the diversity and inclusiveness goals of today’s cannabis advocacy groups? We’ve seen it happen before in other industries — and while our cannabis industry is thriving in Colorado, we’re not immune to such forces.
There are other questions, too. Would states be able to continue to restrict cannabis business licenses to in-state residents? How would state regulation hold up against federal interstate commerce regulations? Will interstate commerce increase the potential for counterfeit cannabis products? And, how far and restrictive will the inevitable patent claims of big pharma reach into the realms of small grows?
The list of questions grows daily and there aren’t any clear and concise answers to them all.
Out of all the questions, though, the most obvious concern to Colorado is the impact of nationwide competition on existing cannabis businesses — from which the state generates a large amount of its tax revenue.
Arizona will take some time to roll out regulations for the recreational cannabis approved on election day, and the extent of their impact is not yet known. There’s a chance a legal recreation market in Arizona could impact Colorado — we remain the place to which many pot tourists flock from illegal states. Will our cannabis industry take a hit now that there’s legally accessible weed in more states? Chances are good, but it remains to be seen.
What won’t change right now, though, is the threat from legal cannabis for Texans — Polis’ favorite tourists. The state remains a fully prohibitive state, but perhaps not for too much longer.
While it has yet to push forward a realistic plan for a legal medical or recreational market, the massive Lone Star state is desperate for a new source of revenue to cover a projected shortfall of $4.5 billion this year. Seizing upon the legalization success of other states, Texas Democrats are again pushing cannabis bills in their December House session in hopes of solving the budget crises — via taxes on cannabis.
With an estimated cannabis demand of $550 million annually, maybe Polis should direct his ‘jump in, the water’s warm’ tweets elsewhere. It’s only a matter of time before that big red state goes green, too.